Financial reporting requires that firms recognize product financing arrangements as liabilities if which of the following conditions is met?
A) The arrangement requires the sponsoring firm to purchase the inventory, substantially identical inventory, or processed goods of which the inventory is a component at specified prices.
B) The selling or sponsoring firm physically controls the inventory.
C) The payments made to the other entity cover all acquisition, holding, and financing costs.
D) Both A and C are correct.

Question

Quizplus · Accepted Answer

According to financial reporting requirements, firms must recognize product financing arrangements as liabilities if they meet any of the following conditions:

A) The arrangement requires the sponsoring firm to purchase the inventory, substantially identical inventory, or processed goods of which the inventory is a component at specified prices.

C) The payments made to the other entity cover all acquisition, holding, and financing costs.

Therefore, if either condition A or C is met, the firm must recognize the product financing arrangement as a liability. Choice D, which states that both conditions A and C are correct, is, therefore, the best choice.

Financial Reporting Requires That Firms Recognize Product Financing Arrangements as Liabilities